Carney Confirms Rate Hike Is Near as BOE Heads for ‘Tipping Point’

Updated on
  • Policy makers speak as inflation climbs to 5 1/2-year high
  • Officials see economic slack eroded, though not all agree

Pedestrians walk past the Bank of England (BOE) in the City of London, U.K., on Thursday, July 14, 2016.

Photographer: Chris Ratcliffe/Bloomberg

Mark Carney reaffirmed that the Bank of England is close to its first interest-rate increase in over a decade, as inflation hit 3 percent and one of his colleagues said the economy is approaching a “tipping point.”

In a series of testimonies to lawmakers, the BOE governor and the two newest members of the rate-setting Monetary Policy Committee signaled that the erosion of economic slack is dominating their thinking as they prepare for a Nov. 2 decision. The appearances coincided with a report showing consumer prices rising at the fastest pace since April 2012.

“Having used up more spare capacity, having seen some evidence of building domestic pressures, the judgment of the majority of the committee is some raise in interest rates over the coming months may be appropriate” -- BOE Governor Mark Carney

The BOE has been in countdown to a rate increase since saying in September that such a move might be needed in the “coming months.” While economists and markets are largely expecting a hike in November, Carney -- in line with earlier comments -- declined to be that specific on Tuesday. The pound fell for a second day against the dollar, dropping 0.6 percent.

Slack Outlook

For policy makers, a chief concern is that the economic slack that can dampen price pressures may soon be eroded. Unemployment is at a 42-year low and uncertainty caused by Brexit -- which Carney repeatedly referred to -- threatens to constrain output. New data on the labor market, central to the MPC’s analysis, will be published on Wednesday.

The BOE chief admitted that while consumer-price growth is close to peaking, it’s more likely than not to accelerate again this month. That would put it more than a full percentage point above the central bank’s 2 percent target, meaning Carney will have to write a public letter of explanation to the Treasury.

MPC member Silvana Tenreyro said in her testimony that the BOE may soon need to act, though she stuck to the “coming months” line and emphasized that her decision will depend on how the economy evolves.

“My view is that we are approaching a tipping point at which it would be necessary or justified to remove some of that stimulus,” she said. “If the data outturns are consistent with the picture I just described, of an output gap going toward zero, then I’d be minded to vote for a bank rate increase in the coming months.”

Even so, the hearing at the Treasury Committee -- which was the first opportunity to hear the views of the Tenreyro and newest MPC member Dave Ramsden -- underlined that differences remain in the group’s thinking.

“I still think there is some slack in the economy,” Ramsden said, noting that he wasn’t among the MPC majority at the September meeting that saw a likely need for higher interest rates soon. “I’m going to approach each MPC meeting as it comes.”

According to Bloomberg’s latest monthly survey, 76 percent of economists expect the BOE to lift its benchmark by 25 basis points to 0.5 percent next month. That’s up from 22 percent of respondents in September.

For Sam Hill, senior U.K. economist at RBC in London, the “central case” remains a November increase “However, that move may not come with a unanimous vote,” he said.

Carney’s testimony was his first since February, in which time the U.K.’s negotiations to leave the European Union have made little progress. The governor’s interactions on the topic with the Treasury Committee were less tempestuous than previous exchanges. Vocal pro-Brexit lawmakers Jacob Rees-Mogg and Steve Baker -- who criticized his comments and policy -- have left the panel.

— With assistance by Jill Ward, Catherine Bosley, Zoe Schneeweiss, David Goodman, Fergal O'Brien, Andrew Atkinson, Alessandro Speciale, and Marcus Bensasson

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